All posts tagged FOMC

Platinum continues to trade at a slightly higher price than gold, but the threats to supply which recently pushed platinum prices above gold are now easing, while this week offers a number of opportunities for gold prices to surge higher.

Two weeks ago, platinum prices surged, rising above gold for the first time in 10 months, after the largest producer of the metal Anglo American Platinum said it would halt operations at several mines in South Africa amid rising costs. Meanwhile, a gradual pick-up in economic data globally has kept the general outlook for platinum’s demand side more upbeat.

However, this week, the mining company met with South Africa’s department of mineral resources Monday and agreed to a 60-day “detailed consultation process” with unions and government before proceeding with its restructuring plan.

The news stalled concerns over imminent platinum supply tightness, and platinum’s price leveled. Wednesday afternoon, platinum was trading at around $1,682 a troy ounce, while gold was only some $5 lower, trading at $1,677/oz.

At the same time, a number of catalyst events are in line this week which have the potential to boost gold back above platinum.

Wednesday has already seen the yellow metal jump around $10 after a disappointing reading on U.S. growth stoked hopes for a prolonged period of economic stimulus.

Spot gold traded at its lowest price in more than four months Friday despite a strong start to the New Year. The swing comes at a crucial time as investors struggle to predict the yellow metal’s 2013 trajectory, rushing to lower forecasts and increasingly questioning the robustness of gold’s 12-year bull market.

The metal Friday hit its lowest price since Aug. 21, slipping around 2.3% on the day to $1,626.18 a troy ounce, after Federal Open Market Committee minutes cast a shadow over the longevity of the Fed’s gold-positive stimulus program. It’s since nudged back to $1,636.75/oz.

The FOMC minutes showed officials were divided at the December policy meeting about when to halt the quantitative easing and bond-buying programs.

There’s something in the water in the gold market this week. Despite news of a fresh dollop of quantitative easing from the U.S. Federal Reserve, gold prices have stalled, as the temptation to lock in profits has proved greater than the allure of continued loose monetary policy.

European spot gold fell by 1.3%–or around $20–Thursday to hit a four-day low at $1,689.62 a troy ounce, as investors cashed in on gains from a short-lived rally immediately following news of the Fed’s decision.

Usually, increased liquidity triggers gold demand as some investors consider the metal to be a hedge against currency weakness and inflation. Earlier rounds of quantitative easing by the Fed pushed the price of gold to a record high of around $1,920/oz last year.

On Friday, gold was still struggling for traction, hovering just below $1,700/oz in cautious, lackluster trade.

A soothing pledge of extended stimulus from the U.S. Federal Reserve can still buy a hefty global rally in stocks, but, with developed-market debt and economic growth still under the spotlight, investors and market commentators aren’t sure it will be a long one.

“While extended low interest rates are welcome, it’s not really likely to jolt the U.S. economy back on to the path of growth or reverse the downward trend so rallies may be short lived,” said Jonathan Sudaria, a dealer at London Capital Group.

The big news from Tuesday’s Federal Open Market Committee came when Fed chairman Ben Bernanke said U.S. interest rates would probably remain at their record lows for another two years. This is explicit stuff for a central banker even if, as one market watcher commentated, no one seriously thought that rates would be rising soon anyway. It also came at a price: three of the 10-member FOMC dissented, presumably opposed to such a bald guarantee of largesse.

Mr. Bernanke also held out the prospect of other stimulus measures, which markets assume means a third tranche of quantitative easing, should the economy turn out to be even weaker than the Fed now expects.

Some of you might have missed Wednesday’s FOMC announcement or somehow misinterpreted it. Just to be clear, the U.S. Federal Reserve, the central bank that serves not just Wall Street but you the little people, has again fired up the printing presses. This time we’re doing it to spend around $900 gazillion, of which $600 googleplex is new money, on U.S. Treasury bonds, which mature, on average, in five years’ time.

Don’t get too stuck on the numbers. They’re flexible. We can keep increasing them.

And don’t worry about how much it costs us to print all this money–what with ink, paper and rag prices all going up, you might think that the notes we produce will soon be worth less than their face value. Kind of like what’s happened to coins. Rest easy, we don’t actually print all this new money. We just type in numbers with lots of zeros onto a computer spreadsheet. Besides, if it came to it, we’d just produce larger denomination notes. A million dollar bill anyone?

Predicting how the dollar will fare after the FOMC’s momentous policy decision Wednesday is a mug’s game.

With only hours to go, financial markets remain as uncertain as ever–not only over what the Fed will do but over how other policymakers will react and how investors will respond. In each and every case, the odds are wide open. Start with the FOMC itself. Probably the best guess at the moment is that the Fed will announce another $500 billion of quantitative easing over the next six months or so.

But lots of questions remain. Will the package be open-ended, paving the way for additional liquidity at a later stage? Or will the Fed surprise the markets in other ways: introduce an inflation target, a growth target, a yield target or even suggest that the end of record-low interest rates is nigh. With both Australia and India hiking rates this week, fears of inflation can hardly be too far away.

Many are still looking for the euro to rally back over $1.40 and way beyond once this week’s Federal Open Market Committee meeting is over. They are assuming that the additional monetary easing that the Federal Reserve will announce will weaken the dollar while the outlook for an eventual euro zone tightening will support the euro.

Certainly, recent economic data has helped to give the bulls some comfort. On Tuesday, for example the latest euro zone purchasing manager’s index for manufacturers was revised sharply higher and the divergence between the performance of peripheral debtor countries and the major economies wasn’t as large as many feared it would be.

Nevertheless, this does not mean that the ECB will have the freedom to exit its own ultra-easy policy stance as early as many in the market anticipate. At the moment, the attention of most financial market players, including euro bulls, is entirely dominated by speculation over what the Fed will do. Come Thursday, however, once the Fed has spoken, their attention should shift back to events closer to home.

Then, the bulls may not like what they see.

Two issues have arisen over the last week or two that are conspiring to keep a lid not only on the ECB’s more hawkish policy intentions, but on the single currency’s ability to stage a serious recovery.

“Anything you can do, we can do better.” This seems to be the message from the U.S. Federal Reserve to other major central banks as they all battle to keep their currencies from rising and choking off their already-feeble economic recoveries.

In this post-recessionary world, it is one thing to enjoy the fruits of recovery and the end of deflation. However, it is another thing to suffer at the hands of a strong currency that will bring an end to export growth before domestic demand recovers. This is precisely the problem facing most major economies–and their central banks.

Japan has already explicitly acknowledged its problem, instructing its central bank to wade into the markets and stop the yen from rising with direct intervention for the first time in six years. The Bank of Japan continues to hover over the market, with Prime Minister Naoto Kan issuing periodic warnings that there is certainly more intervention to come if the yen starts heading higher again. Japan has only followed in the footsteps of Switzerland, which has been battling to keep its currency from rising too far for well over a year.

Elsewhere in the developed world, the pressures are the same but the currency management method has probably been a bit more subtle.

With the FOMC now out of the way, the euro zone’s problems are coming back into focus.

And for the euro, that is not good news.

A renewed widening in yield spreads, heightened fears that peripheral European nations are falling behind their core peers and a general fall in appetite for risky assets all mean that the single currency will come under renewed selling pressure.

It isn’t surprising that forecasts for euro parity with the dollar as early as next year are once more being expressed.

For the past few weeks, the euro has had some respite, reversing about one-third of its previous drop as investors were distracted by disappointing U.S. economic data and fears that the U.S. central bank’s Federal Open Market Committee would extend its quantitative easing program.

In the event, the Fed’s policy shift wasn’t quite as radical as that but its downgrade of growth forecasts and its decision to preserve current liquidity levels once again undermined investor confidence in high-yielding assets.

For months, the pound has been able to shrug off concerns about the poor state of the U.K. economy, with the currency still getting support from risk-hungry investors.

Even news that Dubai World was reneging on $30 billion of debt repayments–much of it owed to U.K. banks–failed to seriously knock the U.K. currency much lower.

However, if currencies are now being driven more by interest rate differentials and less by risk appetite, as events this week suggest, then sterling could be even more vulnerable to heavy losses than it was before.

The following chart shows the pound’s steady performance in recent months.

CQG

The euro is already falling against the dollar on the assumption that euro-zone interest rates will start to rise well after those of the U.S.

Chances are that rates in the U.K. will start to rise even later than that.

Once this timing starts to be discounted by financial markets, then the pound will more than likely find itself falling into third place against the other two major currencies.

For the moment, though, an improvement in the latest RICS house price index, an upturn in inflation and the first fall in the jobless claimant count since February last year have helped to inject some optimism over the U.K. economic recovery.

At the same time, poor data from the euro zone alongside worries about the euro zone’s own banking problems have helped to push the pound higher against the euro.